Raoul The Taxman: "Should I Buy or Rent?"

by Raoul

Hola, amigos! This month's column is in response to a question faxed to Raoul by a R.A.P. member who is actually thinking about his future! Bravo! (As with all questions to Raoul, our inquiring comrade will remain anonymous.) Our friend asks, "...since the real estate market is not what it was several years ago, and considering the fact that in our business we tend to relocate with more regularity than most professions, is it still wise to consider purchasing a home rather than renting?"

Well, this question really hits the spot with Raoul. Not only do I have some very strong opinions in this area, but I feel that my twenty-five years of experience in accounting and taxes has allowed me to get a pulse on the various dynamics that have affected the equation of the national real estate market.

Raoul has been working with individuals, across the country, in the radio/television, music industry and related fields for a quarter of a century. Twenty-five or thirty years ago, some of the most sound advice a CPA could give a client, in most situations, was, "buy a house." Journey back with Raoul to those thrilling days of yesteryear.

I remember one of the first tax returns I prepared for an AM drive-time jock, and my puzzlement as to why, in a period of five years, he had bought and sold homes in three different markets, on which, not merely coincidental to this column, he made money or at least broke even on each one of them. His reply was that when he started out in the business, he had a mentor who related three axioms of the industry to him. They were: 1) You will relocate for employment purposes more than most people; 2) Owning a nice home in your new market makes it easier for your family to feel comfortable and get settled; and 3) The mentor had, in the course of his career, owned twelve houses and made money on every single one. Let's hear it for the sixties!

In fact, for the first twenty years that Raoul has been working with broadcasting people, in over thirty national markets, it was the rare exception that a family owning a home for as little as one year did not have a profit on the sale. This is not a freak statistic, and several factors played a part in this extended period of upwardly spiraling real estate prices.

First, we have the tax ramifications. You have to be from another galaxy not to know that mortgage interest and real estate taxes are deductible, and rent is not. So, as we see, the system encouraged ownership.

Second, the baby boomer generation was just coming into its juice. They had the down-stroke. They had the desire. They had the need, and they had the financing. This added to the demand, which made the supply attractive and, thereby, easier to sell a property for profit.

Third, and most interesting, not only did the decades of the sixties and seventies have some of the best music, they also had a unique character not seen in this country since the post war years. Not only was there a spirit of revolution in the music, but also in the young adults. People were taking risks. They were breaking tradition, leaving the ancestral home, and taking off for any one of the numerous boom towns of the day that offered opportunity. This had the effect of helping to give this housing boom a national profile.

So, simplistically, we see that there were three factors which helped people make money on their houses. TAXES. DEMAND. LIFESTYLE. Well, as far as I am concerned, those same three ingredients are again affecting the market, but this time around, they've reared their ugly heads in a negative manifestation. Dig Raoul.

Since approximately 1987, the situation has reversed completely. Now, it is the rare exception when clients I see do not lose money on a house, even if they have been in it as long as five years. "How so, Raoul," you ask? Let's take a run back through those big three.

TAXES. Beginning in 1987, the congress (not the IRS, but your elected representatives) severely hamstrung the attractiveness of real estate ownership by introducing loss limitations and straight line depreciation. This was accomplished along with the general spirit of the time, that being to urinate on everything that this country stood for and helped make it economically strong. Pursuits such as risk-taking, business development, and just "going for it" were no longer encouraged by tax breaks, not loopholes, but legitimate incentives to stir the economy.

DEMAND. Remember those baby boomers? Guess what, they are now in their fifties. Their kids are grown, married, out of school, on their own, in the joint, whatever. They are looking to scale down and sell their homes. And, there are a lot of them. Not only is there not enough population behind them quantitatively, but, also, the money is not there. Result? Big supply. Small demand. Flooding the market and, generally, lowering prices.

LIFESTYLE. Not only is it practically impossible to find a commercial radio station that will take a chance with new music these days, most people are generally taking less risks also. Raoul feels that we are in a period of isolation with a desire for security. I don't mean this in a negative manner; it's just the times, man. There are no new boom towns, no new burgeoning industries, and a pathetic lack of pioneer spirit.

Combine all this with the fact that those schlemiels in congress are talking about a "flat tax" that will eliminate the deductions for mortgage interest and real estate taxes, and no wonder nobody can sell their friggin' house! And yes! It is now time for Raoul to answer the reader's question.

I hate to be a weasel, but each situation is as different as the families that live them. If it's right for you, buy a house. If it's not right for you, don't buy a house. Let me explain before the crescendos of "Hey, Raoul, we want our money back" become too deafening.

A good tax advisor/accountant can, with readily available information, project for you the economic or cash flow effect of the rent versus purchase option. It does not take that long, nor should the cost be prohibitive. An hour and a half of professional time is a small price to pay to help determine if you should make one of the most costly expenditures of your life.

So know the numbers and what you can afford. Then, don't buy a house. Steal one! In this economic climate, bid low. Don't listen to the realtor, who is probably taking you to all of his/her own listings. Bid low! Don't be embarrassed, bid low. You will probably never see those people again, so screw 'em, and bid low. They'd do it to you. Chances are, in this economy, someone stole your house. You steal someone else's.

So until next time, be sure to send Raoul your new address. Adios.

Comments (0)

There are no comments posted here yet